Alibaba’s Diversification Leads to…Financial Sector

June 20, 2017

Written By: Mike Ross – Corporate Finance

During the three-month period ending in March, Alibaba’s net-income group share was 10.65 billion yuan (US$1.55 billion), a 98-percent jump over one year. The group’s total revenue was $5.59 billion. Revenue from Alibaba’s core business, retail, amounted to $4.59 billion, while entertainment revenue was $571 million. Retained earnings per share, which refers to the United States, was 4.35 yuan ($0.63), less than the 4.51 yuan anticipated by analysts.

If those results were lower than expected by investors, it is probably due to the fact that Alibaba’s diversification strategy is not yet fully bringing returns on investment.

Alibaba has first diversified its retail activities.

While the group has diversified its activities, it still draws the overwhelming majority of its revenue (82 percent) from its online sales platforms (+ 47 percent over one year). Nearly nine out of ten transactions in China are now concluded via a mobile device. Alibaba has also invested in video and entertainment (for instance, with a minority stake in DreamWorks Studios, a Steven Spielberg company in Hollywood) and cloud computing. Neither sector is bringing back returns yet. In February, Alibaba also joined Shanghai Bailian, a state-owned conglomerate controlling 4,700 permanent stores, with a view to interacting between physical businesses and online platforms. Alibaba has also strengthened its international presence—one year after its acquisition of the electronic-sales platform of Southeast Asian Lazada.

Payment platforms: a stake for Alibaba, but also a GDP stake for China.

With 507 million active monthly users connecting via smartphones or tablets as of March (+ 24 percent over one year), Alibaba is looking to go on with “monetizing” its client database. Alibaba, with its platform Taobao, dominates 90 percent of the market of exchanges of individuals to individuals on the Chinese Internet, and its platform Tmall controls half of the transactions online between professionals and individuals.

Alibaba’s first obvious breakthrough in financial services is in the payments sector. This breakthrough has contributed to hastening the development of the middle and poorest classes of the Chinese population. A recent United Nations report revealed that Alipay (Alibaba’s payments platform) and WeChat Pay allowed the development of digital payments in China of $3,900 billion in 2016, 20 times more than that of the previous four years. The report showed that digital payments, using existing platforms and networks, provide access to a wider range of digital financial services, expanding financial inclusion and economic opportunities across China and neighbouring countries. This change could increase gross domestic product (GDP) throughout developing economies by 6 percent by 2025. Payments on e-commerce platforms are expected to increase China’s GDP by more than $230 billion by 2025, opening up new economic opportunities for individuals and small businesses.

United States Congress is now concerned.

Ant Financial, Alibaba’s subsidiary, dominates China’s online payments industry, which generated 6 trillion yuan (about $870 billion) in transactions in the last three months of 2016. It wants now to expand beyond China. It just made an offer to buy US payments company MoneyGram. This possible purchase of MoneyGram raised concerns from US Congressmen, due to the tremendous amount of US individuals’ data that would fall into Chinese hands.

And beyond payments are credit and savings activities.

Alibaba’s platform Sesame Credit offers alternative assessments of the creditworthiness of clients by examining the credit history, financial behavior, contractual capacity, identity and social networks of users. The digital and mega-dated information generated through retail platforms helps to build a history for client-risk assessment and enhanced access to credit, particularly for financially excluded low-income populations.

Digital finance is helping to significantly increase access to capital for small traders. In September 2016, Alibaba’s financial services subsidiary, Ant Financial (which also operates the Alipay platform), lent 740 billion yuan ($107.86 billion) in total to more than 4.11 million small and medium-sized enterprises and entrepreneurs. More people now have the opportunity to save and invest. Platforms such as Alibaba’s Yu’e bao make financial investment in a variety of products more accessible to low-income populations. This product allows them to invest the money left on digital accounts, gradually leading to an increase in savings. Yu’e bao expanded rapidly from 2013 to 2016 and now manages $158 billion with more than 152 million customers.

Recently, Alibaba has expanded in SME-receivables funding.

Alibaba has invested in Qupital, Hong Kong’s first and largest online invoice-discounting exchange. It allows companies to raise finance against their receivables by connecting them with professional investors, hedge funds and family offices. Accessing cash when you need it is most critical for the success of any business, especially start-ups and SMEs (small and medium-sized enterprises). Qupital is positioning itself to address this major problem and help solve the reported $200 million SME-financing gap by allowing them to turn their invoices into cash. The opportunity is huge, with the receivables market size in China alone being more than $3 trillion annually.

Despite some experts’ disappointments with first-quarterly results, US hedge funds increased their holdings in Alibaba Group Holding Ltd. more than any other US-listed Chinese stock in the first quarter. A good sign that they believe in Alibaba’s future.

Alibaba’s Diversification Leads to…Financial Sector was last modified: June 20th, 2017 by corporatefin